Q&A

Q&A: Trust in the flexibility of living trusts

September 30, 2024 By Liz Weston

Dear Liz: Is naming a beneficiary for a nonretirement, “payable on death” account as effective as putting the account in a living trust? It seems easier than doing all the paperwork each time I open an account, but is it a good idea?

Answer: Both living trusts and payable on death accounts avoid probate, the court process that otherwise typically follows death. But living trusts offer more flexibility and control.

Let’s say you want to benefit two relatives equally, and are leaving a savings account to one and a brokerage account to the other. The balances of the two accounts may be roughly equal today, but could be dramatically different by the time you die. A trust allows you to divvy up your assets regardless of where the money is kept.

Trusts also allow you to put restrictions on how money is spent, which can be important if your heir is a minor child, a spendthrift or someone reliant on public benefits. Payable on death accounts don’t allow restrictions.

Should you become incapacitated, the successor trustee of your living trust could access trust assets to pay for your care. Beneficiaries of payable-on-death accounts can’t get to the funds until you die, so a court procedure may be necessary to provide for you.

After you die, the person settling your estate probably will need money to cover your burial and funeral expenses, pay your bills and final taxes and perhaps get your house ready for sale. If the needed funds have already been distributed to beneficiaries of payable on death accounts, this person might be faced with asking for funds to be returned or paying out of their own pocket, says Jennifer Sawday, an estate planning attorney in Long Beach.

There’s also the piecemeal nature of payable on death accounts. Keeping track of and updating beneficiaries can be a chore. If a beneficiary dies before you, that can create administrative problems as well.

Payable on death accounts can be a low-cost solution for people who don’t have much money and who can’t afford to pay for a trust. If you already have a trust, though, it makes sense to use it.

You typically don’t have to update your living trust every time you open a new account, by the way. Discuss the issue with your estate planning attorney, but typically all that’s needed is to add the account to the schedule of assets that’s usually at the end of your trust document.

Q&A: More about health savings accounts and the ‘deathbed drawdown’

September 23, 2024 By Liz Weston

Dear Liz: I just read your column on HSA accounts. I was with you right up until “deathbed drawdown.” I sincerely hope that I am not thinking about my HSA when I am nearing death. I’d just rather pay the tax.

Answer: That’s certainly your prerogative, but financial planners note that good record keeping can allow those with large HSA balances to avoid an otherwise unnecessary tax bill.

HSAs offer a rare triple tax break: contributions are tax-deductible, the money grows tax deferred and withdrawals are tax free when used for qualifying medical expenses. Furthermore, HSAs can be rolled over from year to year and invested for growth, which has led some people to accumulate substantial sums as a supplement to their retirement funds.

Fortunately, you don’t have to take a withdrawal in the same year you incur an unreimbursed medical expense. As long as the expense was incurred after you established the HSA and before your death, it can justify a tax-free withdrawal years or even decades later. Those who have kept good records of their unreimbursed medical expenses can justify last-minute withdrawals if necessary.

Q&A: Spreading the wealth in health savings accounts

September 23, 2024 By Liz Weston

Dear Liz: I have a family health savings account with a qualifying high-deductible health insurance plan. The HSA will become my individual account when my youngest turns 26 and no longer qualifies for our insurance plan. My husband can’t contribute to an HSA because he’s on Medicare. I have read that if I die before him, he can use my HSA for his own medical expenses. Can I use my HSA to pay his medical expenses now, even though I can’t contribute to it on his behalf?

Answer: Yes. A spouse can use HSA funds for the qualifying medical expenses of a spouse as well as other dependents, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If you want to pass the funds to your husband should you die first, you should make him the designated beneficiary of the account. Otherwise, the account could become taxable at your death, as mentioned in last week’s column.

Q&A: A retirement catch-22 and health savings accounts

September 23, 2024 By Liz Weston

Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

Q&A: Calculating Social Security benefits when a lengthy marriage ends

September 16, 2024 By Liz Weston

Dear Liz: I was married for 18 years before filing for a divorce. I am 71 and my husband is 76 and still working full time. He waited until he was 70 to collect his Social Security. Social Security told me to wait to file until he did to collect the maximum amount. I did, and then they told me that 50% of his benefit is less than my own benefit. Therefore I do not qualify to get benefits as a divorced spouse. I only get $1,200 a month. I made about $30,000 a year while he made six figures. I do not understand Social Security. I am barely getting by.

Answer: You got some bad information. Divorced spousal benefits, like spousal benefits for those who are still married, are based on the primary worker’s benefit at full retirement age. Spousal and divorced spousal benefits aren’t eligible for the delayed retirement credits that increase workers’ benefits when they delay applying for Social Security after full retirement age. In other words, you couldn’t benefit from your ex’s delayed start.

Like other retirement benefits, however, spousal and divorced spousal benefits are reduced if the applicant starts benefits before their own retirement age. If you applied at 65 and your full retirement age was 66, for example, you wouldn’t have qualified for the maximum divorced spousal benefit. Your own retirement benefit was reduced as well. If you’d been able to wait until after full retirement age to apply, your own benefit could have been increased by 8% for every year you waited until age 70.

It may seem odd that your benefit is still greater than what you could have received from his record, given the disparity in your incomes. But Social Security is designed to replace a bigger chunk of lower-paid workers’ incomes compared with higher-paid ones, on the assumption that lower-paid workers have a harder time saving for retirement. His income may have been four times larger than yours in recent years, but his Social Security benefit wouldn’t be four times bigger, or even twice as large.

What’s done is done, of course, but there may be a larger benefit in your future. If he dies before you do, then you would be eligible for a divorced spousal benefit, which would be 100% of his benefit (the one he’s getting when he dies, complete with delayed retirement credits and cost-of-living increases).